How to manage your budget with the 50/30/20 rule

Championed by Senator Elizabeth Warren, the 50/30/20 rule is a good example of how budgeting needn’t be a minefield of spreadsheets and figures. It’s a simple, clear cut way to organise your finances if you feel somewhat overwhelmed about where to start your budgeting journey.

Just like any skill – budgeting is something you get better at the more you practise it. If you are looking for a place to start developing your skills you should give the 50/30/20 method a try.

How it works

The universal appeal of the 50/30/20 rule is its simplicity. It essentially divides your entire life’s spending into three categories.

50% on Needs: 50% of your salary should be spent on essentials like rent, bills, transportation, and food: your ‘needs’.

30% on Wants: 30% should be spent on leisure activities and hobbies, such as gym memberships, holidays, or buying take out on a Friday when you’re totally frazzled. Ie. Things you like having but don’t strictly need.

20% on Savings: The final 20% of your salary should go into your savings, or to pay off any outstanding debts you have, such as credit cards or student loans.

And it really is as simple as that!

You need to know what you’re working with

As with anything – you can’t build castles out of thin air. If you are going to implement a budgeting technique you need to know exactly what money you have coming in first.

This can be tricky if you have a variable income, or get paid at different points throughout the month. A way to manage this without making your life overly complicated is instead of dividing your overall income into three parts, just apply the 50/30/20 weighting to each paycheque you receive and divide the money as you earn it.

Be firm with your spending categories

You can’t decide half way through the month that your daily coffee needs to move from ‘wants’ to ‘needs’, or vice versa. You need to be clear on which category each cost belongs to and keep it there.

Deciding how to classify different costs may take a few months to finalise initially, but each time you define something make sure to note it down so that you can keep track of it for future months and you reduce confusion going forwards.

It helps to go digital

If you aren’t a fan of lists or hand written inefficiency, then using a money app can be a great alternative.

Automatic classification of each spend on into useful categories like ‘food and beverages’, ‘transportation’, or ‘self-improvement’, can significantly streamline the initial categorisation process and increase the efficiency of the budget. Additionally, it stops minor spends slipping through the net, as all money is digitally accounted for. This means you are more likely to stick to budget, as you do not forget (or wilfully disregard) smaller purchases which could potentially skew the 50/30/20 weighting.

A good money app will also provide an aggregate of your spending data across an entire month and display it in a compact and user-friendly format. It gives you a clearer overall idea of where your money is being spent; as opposed to a less accessible spreadsheet, whose formulae are also more vulnerable to human error.

Don’t be afraid to tailor your budget to your needs

The most important thing about any budget is that it makes sense to you. Whilst the 50/30/20 rule is a great way to start budgeting, saving, and paying off your debts in a manageable way, it is certainly not a one-size-fits-all situation.

If you live in a particularly expensive city, such as London, then it is highly likely that you will be paying far more than just 50% on your housing, transport, utilities, and food costs; such is life. It may be that you need to juggle your weightings slightly to take this into account. For example, you may decide that for you, a weighting of 60/20/20 works better.

Alternatively, you may be fine with the 50% weighting of the ‘needs’ category, but you actually have a lot of high interest debt you need to pay off as soon as possible. In this case you may decide to switch to a 50/20/30 arrangement until you have cleared your debts.

The most important thing to keep in mind is to try not to reduce the savings category to under 20%.